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Merlo, Accountant

Category: Tax

Satisfied Customers: 9783

Experience: 25+ years tax consulting. Specializing in returns for US citizens living abroad

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I own a condominium which I purchased in 1992 and which was

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I own a condominium which I purchased in 1992 and which was my family's primary residence until 1999. In 1999, I converted the property to a rental. I originally paid 85,000 for the property. I have depreciated it for the past eleven years. I now want to sell it for 250,000. Could you inform me what I will have to pay in Capital Gains Tax on this sale. Thank you. Angela.

Your gain will first be calculated by taking the sale price less your basis. So if you sell it for $250,000 and your basis is $85,000, you have a long term capital gain of $165,000. That part of your gain will be taxed at 15%. In addition, you must "recapture" any depreciation you claimed over the years as part of your gain. So depending on the amount of depreciation you have claimed for the last 11 years, that also becomes part of your gain. That portion of your gain is taxed at a flat rate of 25%.

Dear Merlo: Does this mean that for the first tax rate I would have to pay $24, 750 and based on having paid a total of $49,500 in depreciation I would pay another $12,375 -25%) in taxes. Thats a total of $ 37,125 in taxes! What if I sold it for less, would these same tax percentage rates apply? Angela.

If you sell the condo for $250,000 and you paid $85,000 for it, then that gain of $165,000 is taxed at 15% or a total of $24,750. If the amount of depreciation you claimed over the years is $49,500, then you owe tax on that at a rate of 25% or a total of $12,375. So yes, it is correct you would pay a total of $37,125 in taxes.

If you sell if for less you would owe less tax, but the formula is the same -- so you still do not gain anything by selling the property for less money. You end up paying less tax but you also get a lower selling price, so you are still better off to get the highest selling price you can. The percentages of tax you pay stay the same regardless of how much you sell the condo for.

The part that is attributable to deprecation will remain the same regardless of what you sell the condo for. So the $12,375 tax is a given no matter what you sell it for. The other part of the gain (sale price less your basis) is taxed at 15%. So as an example, if you lower the selling price by $10,000 then you save $1,500 on taxes. But at the same time you are getting $10,000 less for the condo, which would not really benefit you.

Dear Merlo: I will accept these answers, but before I do I have one more question(by the way I have subscribed to the monthly service) I don't want you to feel I'm abusing this system. I failed to include in my question that this is the only real estate property I have ever owned and that I would be selling it in order to pay off a mortgage of $60,000, which I still owe on it and be able to purchase another single family dweling for $199,000. Does this info. contribute to changing my potential tax debt for 2010? Also, I have made capital improvements and repairs and paid for maintenance and special assessments to the condo association throughout the years. Do these expenses get deducted before the profit is calculated- thereby contributing to reduce the first tax rate and if so where would you suggest that I go to in order to obtain a listing of the expenses that would be allowed? Thank you so much for your help. Angela.

I apoligize for the delay in responding. The JA website just went off line for no apparent reason and I was unable to get back in the forum until just now.

Using the money from the sale to pay off a mortgage does not lower your tax liability. It does not change the gain you had from the sale. The current mortgage is not taken in to account when calculating your gain. It also does not matter that this is the only property you ever owned.

As far as the improvements you made to the property, the cost of those improvements can be added to your purchase price to increase your basis. Improvements cover everything except for routine minor repairs. Improvements would include such things as a new roof, new carpeting, new tile, new plumbing, new HVAC units, repaving the driveway, putting up a fence, etc. Any improvement you make which is expected to have a normal life of one year or more qualifies to be added to your basis. So you can increase your basis by those amounts and this will help reduce the portion of the gain on which you owe the 15% tax. The 25% you owe on the depreciation will remain the same.

As far as using the money to buy another residence -- you can participate in what is called a 1031 Exchange of properties. This is when one investment property is sold and the proceeds are used to purchase another like kind investment property. If you were to choose that alternative, then the taxes would be deferred until such time as you sell the second replacement property. At that time, the very same rules would apply. But if you plan to simply purchase a home that you will use yourself as a residence or a vacation home or anything else other than another rental property, then taxes will be due on the sale of the first condo.

If this was helpful please press the Accept button. I realize you have paid for a monthly service. Pressing the accept button simply gives us credit for helping with these questions and does not add to your charges.

Dear Merlo: Thank you so much. One last question - It is my intention to purchase a single family dwelling for investment purposes, so this 1041 Exchange sounds like the way to go, but if and when, I was to sell this new property, would I be responsible for the taxes on the Condo in the same amounts as we have been talking about, plus the taxes on the second property as well? And would the percentage rate remain the same or might they change with time?

The same principles would apply on the sale of the second residence. Your basis in the first residence would transfer to the second property. In other words if your basis in the condo (with improvements) was $100,000, then that same basis transfers to the new property you exchange it for. When you later sell that second property, you would use the $100,000 as your basis for calculating the gain.

While the same principles will apply it is very possible the tax rates will be different. Right now the long term capital gains tax is at 15%. That is set to increase next year to 20%. It could change from year to year and will depend on what rate is in effect at the time you sell the property. The same thing applies to the depreciation portion. Right now that rate is 25% but could easily change at any given time.

There are very strict rules for completing a 1031 Exchange so make sure you read up on these beforehand. You cannot simply sell the property on your own. You must actually go through someone who is a qualified 1031 intermediary who handles all of the transactions on your behalf. There are also time limits in which you must identify and take possession of the new property etc. so be sure to research the 1031 rules before proceeding.

Excellent information, very quick reply. The experts really take the time to address your questions, it is well worth the fee, for the peace of mind they can provide you with. OrvilleHesperia, California

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